What's your next milestone on the savings journey?

jamesd

jim8888 said:

Now I'm in retirement and having to make real decisions and actually having to withdraw monies after just saving for decades is quite intimidating. I was a big fan of pension freedoms - and still am - but managing the amount of money in such a complex arena is challenging. How do I minimise my tax exposure? Which pot should I draw on first - my DC pension, my DB pension, my own savings and investments? How do I avoid or minimise the future breach of the LTA? I've found this forum absolutely invaluable in helping me navigate some of these considerations.

Typically taking DB first because actuarial reduction decreases income and hence lifetime allowance use. No account is taken of the extra years of payment in the LTA calculation.

Using full basic rate in pension withdrawing is commonly a good idea to reduce the chance of an increase in drawdown pot value at age 75. Some people will need years at higher rate to achieve it. VCT buying can be used to mitigate the tax cost if those are a suitable investment for you.

Non-pension likely last and probably increasing with money from the pension in the early years. ISA is handy and allows unlimited withdrawing without tax consequences and it's one reason why maximising initial drawing from pensions can be helpful, to avoid potential future income tax bills if a lump is needed.

Inheritance tax considerations can favour leaving money in pensions but I tend to prefer suggesting giving while alive because that offers earlier and likely greater benefit to the recipients, while allowing the giver to enjoy the gains they see.

jamesd

LookingForward20 said:

Just turned 37. Current SIPP is £182k just about to add £50k contribution (using some carry over from last year). Planning on minimum of £20k per annum into SIPP moving forward but hoping to get closer to £30k every year. 

Hoping to hit £250k first half of next year and then aim for £500k by my Mid-40's. Sacrificing a lot to put the money into my SIPP currently but hoping my future self will thank me!

Looks as though you might be contributing too much into pensions. Depends on your retirement income needs and desired retirement age though.

With £232k at 37 and say 3% real growth until you reach earliest non-preserved pension access age of 57 that'd take you to £419k inside the pension. At the long term UK equity return rate of 5% plus inflation it'd be £615k (and possibly exceeding a frozen lifetime allowance that'd be worth about £673k after 20 years at 2% inflation).

You're going to need to accumulate a good deal outside the pension to allow retiring before age 57 and also it appears likely that the lifetime allowance is going to be a factor, implying backing off on the pension contributions to what gets an employer match, or perhaps somewhat more if your income is high enough.

To target the earlier retirement you can maximise ISA use every year and do some VCT investing to get their 30% tax refund, capped at tax due, assuming smaller company investing is suitable for you to some degree. You have to repay the tax refund if you sell within five years, you can in some ways look at this as continually recycling the same five years worth to get the tax break without needing more than five years worth in the VCTs.

Don't stop making pension contributions that get a good employer match.

Pensions are great but the lifetime allowance is increasingly causing people with early retirement plans to fall back to pre-2015 practices to get the desired income and retirement ages.

Nurse2047

Hi I’m 42 and only started learning about investing during Covid stay at home time. My aim is for £100k in vanguard sipp/S&S isa before age 50. Currently at £21,000 in total for them both. I currently have a DB pension with NHS retirement age 65 🤯😭 hope this pot can support me if I retire earlier than 65 🤞

MK62

I very much doubt that the LTA will be frozen for 20 years (and in it's current form) - no guarantees of course, but I'm really not sure planning for that eventuality, by reducing pension contributions now, is warranted. Would it not be better to keep the pension contributions up, and worry about the LTA later, if and when you start to get nearer to it?

DT2001

MK62 said:

I very much doubt that the LTA will be frozen for 20 years (and in it's current form) - no guarantees of course, but I'm really not sure planning for that eventuality, by reducing pension contributions now, is warranted. Would it not be better to keep the pension contributions up, and worry about the LTA later, if and when you start to get nearer to it?

As you say LTA will be ‘different’ in 20 years however surely the best way to plan for retirement is using what is current plus diversification. As jamesd says possibly reduce but it depends on marginal rate of tax, employers contribution, when retirement is wanted and amount.

Personally I’ve aimed for roughly same amounts in SIPP and ISA’s and equal with OH. I haven’t nailed it but will have income, at the moment, from small DB’s, SiPPs, ISAs, property and solar panels. It will not be the most tax efficient way to have accumulated or to decumulate however it will provide the ballpark figure we want and any adverse changes to my taxation will have a smaller effect.

MaxiRobriguez

MFW2026 said:

Hi I’m 42 and only started learning about investing during Covid stay at home time. My aim is for £100k in vanguard sipp/S&S isa before age 50. Currently at £21,000 in total for them both. I currently have a DB pension with NHS retirement age 65 🤯😭 hope this pot can support me if I retire earlier than 65 🤞

You should be able to work out roughly the impact of your annual NHS pension if taken early. The schemes are fairly transparent, with the only thing you need to forecast being your final/average expected salary by the time you get to your wanted retirement age. Then it's a case of plugin the numbers and see if it's enough. If not, work longer, or save harder in the meantime.

jamesd

MK62 said:

I very much doubt that the LTA will be frozen for 20 years (and in it's current form) - no guarantees of course, but I'm really not sure planning for that eventuality, by reducing pension contributions now, is warranted. Would it not be better to keep the pension contributions up, and worry about the LTA later, if and when you start to get nearer to it?

That depends on retirement age objective. For most posters here there's already enough in the pension with the planned 50k and likely growth for the years beyond age 57 and the challenge is accumulating enough outside the pension to allow retirement earlier than that. The get retired early challenge is bigger than the LTA issue.

Pensions are good but it's worth noticing that twenty years is as many as four VCT cycles paying 120% total tax relief over all four combined, with just one lot of five years money cycling through them and the potential to make tax relief equal tax due every year from now on. If that level of VCTs is suitable for the individual, of course. Getting started on a VCT cycle seems to have the biggest potential payback in terms of relief, potential growth and access age. Once five years and nil effective income tax rate is in place and if the pension pot value then makes it look sensible, pensions could be bumped up again, though I'd put that behind maxing out the ISA limit (but VCT before ISA until the cycle is full).

That's assuming there is a desire to get retired early, or at least have that potential as a contingency.

justcheckin

jamesd said:

Pensions are good but it's worth noticing that twenty years is as many as four VCT cycles paying 120% total tax relief over all four combined, with just one lot of five years money cycling through them and the potential to make tax relief equal tax due every year from now on. If that level of VCTs is suitable for the individual, of course. Getting started on a VCT cycle seems to have the biggest potential payback in terms of relief, potential growth and access age. Once five years and nil effective income tax rate is in place and if the pension pot value then makes it look sensible, pensions could be bumped up again, though I'd put that behind maxing out the ISA limit (but VCT before ISA until the cycle is full).

I have seen you write a few times about VCTs and I know you rate Albion. I wondered if you could give a worked example of the preference order of wrappers which illustrates the above bold, italicised quote? I don't disagree at all, I genuinely can't follow the maths.

jamesd

While I continue to like the Albion VCT it has been forced to change its investment practices away from primarily asset-backed projects by rule changes, so it's much less atypical than it used to be. At the moment I'm diversifying into other VCTs, though just as good investment practice, not because of any dislike.

In the case at hand the lifetime allowance is probably going to be a major factor in the pension and there's a potential desire to retire before pension money becomes available. Both of those imply merit in using non-pension investing. 

Of the common non-pension investment options, VCTs offer a tax refund of 30% of the purchase price, capped at income tax due in the year of purchase. They also have dividends which are tax exempt and aren't subject to capital gains tax. Say you're a basic rate tax payer with a taxable income right at the top of the possible basic rate band if pension contributions are ignored (they increase the basic rate band). That's £50,270 total and taxable is that minus the personal allowance of £12,570, which is £37,700. Income tax at 20% on that is £37,700 * 0.2 = £7,540. Say you want to eliminate that income tax bill, as I do. You can buy £7,540 / 0.3 = £25,133 of VCTs. In practice you need to buy VCTs in £1,000 increments so you buy £25,000 worth and get tax relief from HMRC of £25,000 * 0.3 = £7,500. This leaves you with a net of just £40 of income tax due in the year.

So, you get that tax relief and over the five years you also get whatever dividends are paid. I'll assume 5% of the undiscounted purchase price since that's a fairly common sort of level, which is £1,250 a year. After five years you can sell. Ignoring potential growth and assuming there's a ten percent discount to value when you sell, you sell for £25,000 * 0.9 = £22,500. Over the five years you've received £7,500 from HMRC, 5 * £1,250 and £22,500 = £36,250. You're going to be buying again so you set aside £25,000 for that and the remaining £16,250 you keep as deferred income.

You keep doing this each year,selling and recycling each chunk every five years for as long as is useful, though I'm not yet interested in selling because I like the tax exempt dividends. It's roughly what I'm doing to extract money from my DC pension pot with minimal net tax cost and getting smaller company investments that are suitable for my interests.

Once you retire you can sell to get more income without needing to reinvest because you may no longer have the income to benefit from the relief. Or like me you could continue to invest in VCTs while withdrawing taxable income for the ongoing benefit.

With higher rate income tax charging 40% you end up doing more VCT buying per Pound of income but the end result is the same, effectively no income tax bill provided you're willing to defer some of your income for a while. With lots of higher rate income it may take two or three or more cycles before you have enough capital to do enough VCT buying to cover your whole income.

I can't give a single preference order because individual circumstances matter.

handful

My next milestone is £0.5m. Current age is 59

Current DC pots with combined worth of around £310k

DB pot worth £3.5-4k per year from age 65 but transfer value is £85k so will call it as valued at that.

S&S Isa grown from £40k last year to £61k

Total of these is £456k so around £44k to reach that next milestone. Hampered a bit by now putting spare funds into my OHs pension to try and build it enough to maximise TR when we start drawing down, hopefully not in the too distant future! I do put in enough to get full higher rate TR on my contributions of around £8.5k per year